Fed E-Mails Shed Light on Bank of America Deal

Federal Reserve Board officials sharply criticized Bank of America Corp. and its chief executive, Kenneth Lewis, in e-mails to each other after the company tried to pull out of its deal to buy the troubled investment bank Merrill Lynch & Co., according to documents unearthed by congressional investigators.

During the December standoff between B of A and top government officials, Fed Chairman Ben Bernanke dismissed the threat as a "bargaining chip," according to the e-mails. Fed lawyers called the Charlotte company's arguments "not credible," and a top examiner said Lewis' own position "seems somewhat suspect."

The e-mails and other documents, subpoenaed from the Fed as part of an investigation led by Rep. Edolphus Towns, D-N.Y., shed new light on one of the most controversial moments of the financial crisis.

The documents confirm that Bernanke was willing to threaten Lewis with removal as CEO if he reneged on the Merrill deal and later sought assistance. The e-mails also suggest that Fed officials had a dim view of B of A management, with the Fed's top lawyer saying at one point that Lewis "can be reckless."

The Fed did not have an immediate comment on the e-mails.

James Mahoney, a spokesman for B of A, said, "These were extremely difficult times in which all parties were working nights and weekends in an effort to prevent a severe financial collapse, and we believe it involved good people working with good intentions."

The question of who said what to whom became supercharged this year as a result of testimony provided by Lewis to New York Attorney General Andrew Cuomo as part of another investigation. Lewis said then-Treasury Secretary Henry Paulson threatened to remove B of A's management and the board if the company did not go through with its purchase of Merrill. Paulson later said that he did so in part because of the Fed's position on the matter.

Lewis also said that Paulson pressured him to not disclose publicly details about the government bailout talks, and the CEO suggested that Bernanke concurred. Bernanke later denied pressuring Lewis over the disclosure issue. The correspondence uncovered by Congress shows that Fed officials were aware of the question of disclosure, but the e-mails do not clearly support or contradict Lewis' assertion.

His accusations sparked the congressional investigation that will reach a climax today, when he is scheduled to testify in front of the House Government Reform Committee.

B of A agreed to acquire Merrill in September. When the extent of Merrill's losses became clear, B of A tried to back out of the deal by invoking a "material adverse change" clause.